A managed investment fund may hold investments in the form of shares in several mutual funds, exchange traded funds, or other funds or investments. Such a managed investment fund may also be referred to as a fund of funds. The managed investment fund allocates investments among various funds, generally with different investment objectives, based on advice from investment managers. In a simplified example, an investment manager may recommend that a certain percentage of investments be held in a particular category, such as equity funds, and the remaining percentage held in fixed income funds. On the opening of the fund, the fund assets will likely be invested in accordance with the advice. The shares of each underlying fund are marked to market on a daily basis. As the values of shares of each underlying fund change, the percentage of each investment category varies from the recommendations of the investment manager.
Periodic rebalancing of the fund assets is performed in order to update the percentages in each investment category to match the recommended investment allocations. Rebalancing requires sales of shares in underlying funds in the category that is in excess of the recommended allocation, and use of the proceeds of the sales to purchases shares in underlying funds in the category that is below the recommended allocation. Rebalancing involves transactions and use of various resources, including computer system resources and personnel time.